Chairperson's Summary: Committee on Development …

            Chairperson's Summary:
         Committee on Development
               Effectiveness (CODE)


B           ackground. The Doing Business (DB) report measures the burden of busi-
           ness regulation and ranks countries on 10 dimensions. The objective
           is to advance the private sector development agenda by motivating
reforms via benchmarking; inform the design of reforms; enrich international
initiatives on development effectiveness; and inform theory. This evaluation
of the DB report takes an independent look at how indicators are constructed
and what they measure.
IEG Main Findings. The evaluation finds DB indica-    posted on the Web site; it should acknowledge
tors have been effective in drawing attention to      that its published data are subject to change and
the burdens of business regulation, but cannot        make available to researchers all versions of the
capture other important dimensions of a               data set. The DB makes much of annual changes
county's business climate, the benefits of regula-    in country rankings, but these need to be
tion, or related aspects of development. This         understood in context. The DB team should
underscores the need for DB to be interpreted         make clear that DB measures reductions in
cautiously and used in conjunction with comple-       regulatory costs and tracks reforms at the
mentary tools such as Investment Climate              country level, but is not a general indicator of
Assessments. The number and diversity of DB           investment climate quality. Lastly, the DB team
informants need to be increased and their             should use Bank analyses to inform the
information better validated. The DB should take      development of further DB indicators, and
a strategic approach to selecting and increasing      should pilot and stabilize methodology before
informants; define and publish informant              including new indicators.
selection criteria; and be more transparent about
its informant base and changes in data. DB            Draft Management Response. Management wel-
assesses regulations as they are written, not the     comed the evaluation of the DB report, noting its
extent or way in which they are applied. The DB       acknowledgement that the DB exercise has been
reports should not overstate the indicators'          highly effective in spurring dialogue and action
explanatory power. The total tax rate subindica-      on reforms, and the recommendation that similar
tor goes beyond administrative burden to also         benchmarking be applied to other development
reflect a country's fiscal policy choices. Thus IEG   issues. Management highlighted three issues in
recommends that the DB exclude it from the            the IEG recommendations. IEG recommends
calculation of the aggregate ranking but continue     that DB revise the paying taxes indicator to
to collect and publish this important informa-        include only administrative burden measures and
tion. The DB team routinely changes a large           continue to collect and present information on
share of the data after it has been published and     the tax rate but exclude it from the rankings.

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                   However, management finds that this is not              should clarify what indicators are not intended to
                   consistent with IEG's recommendation on use of          measure; DB can help governments improve their
                   Enterprise Surveys and Investment Climate               investment environment; DB needs a clear
                   Assessments to determine regulatory reform              communication strategy to the public and use of
                   priorities, as Enterprise Surveys regularly identify    disclaimers; the indicators may promote regula-
                   the tax burden as a major concern to entrepre-          tions but do not capture effective enforcement of
                   neurs. IEG recommends making available all              the rules; there was recognition that DB indica-
                   previously published data sets to facilitate            tors help to highlight the importance of regula-
                   research, which in management's view would be           tions; IEG found some weaknesses in DB
                   unorthodox; in this context management also             methodology that management should address;
                   notes that back-calculated data series, adjusted        avoid using DB as ranking of countries that may
                   for methodology changes and correction, are             have an impact on resource allocations; and take
                   made available on the DB Web site. Manage-              note that benchmarks and regulations are not
                   ment agrees with IEG's recommendation to                unique to DB--as well as questions on how
                   increase DB informants, and is actively engaged         functional equivalence can be taken into account
                   in this area.                                           across common-law countries versus civil-law
                                                                           countries.
                   DGE Statement. DB is a widely recognized product
                   of the World Bank Group (WBG) and a prominent           Most members agreed with IEG's recommenda-
                   part of its work on private sector development.         tions for DB to take a strategic approach to
                   Being a rating exercise, DB has also generated          selecting and increasing the number of inform-
                   important questions and concerns. Just as it is         ants. There were other comments on the
                   important to disseminate what the DB indicators         methodology of DB: the need to look not only at
                   do, it is important to note what the DB indicators      what the DB indicators do not do, but rather
                   do not do. While measuring the regulatory               focus on what they do; there should be emphasis
                   burden that some firms in the formal sector face,       on reliability of indicators; and the indicators
                   it does not capture some of the most crucial            should capture country advances or effective
                   variables affecting the investment climate of a         reforms. Some members cautioned against the
                   country, such as macroeconomic stability, labor         use of DB indicators to top-rank countries. They
                   skills, access to credit, infrastructure, or corrup-    questioned how to look at rankings. One
                   tion. Going further, they do not touch on the           member suggested including cost of regulations
                   social or economy-wide benefits that regulations        of FDI and DB indicators and to consider
                   yield, such as safety, environmental protection, or     subnational governments' regulations. Another
                   worker protection. While a useful measure of the        member felt the DB indicators do not lead to
                   burden of legal regulations, they are not and           necessary reform and do not consider the politi-
                   should not be used as an index of the quality of a      cal economy, and questioned the work of the DB
                   country's business climate.                             indicators. On the paying taxes indicator, there
                                                                           were diverse views expressed by speakers, as
                   Overall Conclusions and Next Steps. CODE mem-           some do not agree with IEG's recommendations
                   bers welcomed the IEG evaluation of the DB              to exclude tax rate from the indicator. Others
                   report as well as the Draft Management Response.        questioned the rationale for including the tax
                   Overall, members welcomed the IEG review of the         rate as part of the paying taxes indicator. On the
                   DB indicators and commended the quality of the          employing workers indicator, some speakers
                   report. While noting that the DB report cannot          noted that it may overstate what it measures.
                   capture all dimensions of a country's business
                   climate, some members acknowledged its contri-          One member suggested disclosing the DB report
                   butions in promoting reforms in some countries.         together with the IEG review. Management
                   Members raised a wide set of comments--among            stated that it has taken note of comments and
                   them: DB is work in progress; the DB report             suggestions raised during the meeting.

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The following main issues were raised at the               tors measure. The DGE commented that the DB
meeting:                                                   indicators had sparked constructive debate
                                                           among country authorities and business
IEG Evaluation and DB Report. Several members              interests, while also provoking fears that it may
welcomed the IEG evaluation of the DB indica-              distort policy priorities among country author-
tors. A member suggested it be published as part           ities and in the WBG by emphasizing the private
of, or alongside, the DB report. Management                costs of regulation at the expense of social
commented that publishing the evaluation with              benefits.
the report, and doing so annually, would not
be the most practical approach. A speaker                  A member noted that perhaps the IEG report was
proposed that the IEG evaluation be featured on            underestimating DB users (i.e., policy makers), as
the DB Web site. IEG confirmed that there                  they do not necessarily read DB as a document
would be active dissemination of the DB                    that promotes "no regulations." In that sense, he
evaluation. Several members noted DB had                   added that policy makers use the DB report when
spurred debate and has been helpful in improv-             developing policy and can compare with
ing regulatory environments. At the same time,             countries that have implemented similar regula-
some members remarked that the DB report                   tions. Management agreed that policy makers
had shortcomings and that it was a work in                 are faced with a wide range of stakeholders they
progress. A member wondered how DB had                     have to respond to and should not be underesti-
become a flagship document if so many                      mated. IEG noted that the evaluation finds that
shortcomings existed, while a speaker queried              policy makers used DB as one tool among others
as to the quality checks needed to launch a WBG            in developing policy reforms. The DB reports
product. One member noted that for small                   should avoid claiming that specific reforms were
states, this was a very good tool, allowing                directly stimulated by the DB indicators. IEG
countries to assess their business environment.            further recommends that the DB team work with
A speaker added that DB was a product that                 country teams to trace the impact of country-
people wanted to read, understand, and apply.              level reforms measured by the DB indicators.
                                                           One member asked that the DB indicators not be
DB Indicators. A member stated that the method-            used in Bank operations, particularly resource
ology behind the DB indicators needed clarifica-           allocation, while another member noted that
tion, while the indicators had to be simple and            since these are partial indicators they should be
easy to understand. Management noted that one              used with prudence. A member noted that
of the fundamental objectives of DB was to                 Operations Policy and Country Services should
continuously improve indicators to make them               look into how IEG's evaluations can affect the use
relevant and accurate. Another member made                 of the DB indicators in the CPIA exercise.
the case that there was no need to continue to             Management noted that for background
produce DB and suggested that comparative                  information, the CPIA draws on a number of
studies on regulation issues be emphasized. A              data sets, each of which covers only some aspects
speaker commented that DB needed to be                     of economic performance.
clearer as to how an indicator reflects specific
outcomes (i.e., registering a business vs. number          Regulation vs. Deregulation. A member com-
of licenses), as some indicators have issues               mented that improved indicators may not
related to health and safety. Management noted             necessarily lead to correct reforms since they are
that the indicators do not claim to measure all            designed with the assumption that the lighter
aspects of the business environment, and that              the regulation, the better. Management
the decision to keep DB relatively focused was             clarified that the DB report does not reject
in keeping with an earlier Board discussion.               regulation; instead it is the issues of quality and
Management agreed that it is important to keep             efficiency of rules that are the focus of the DB
improving the description of what the indica-              report. IEG noted that their evaluation supports

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                   that policy makers use the DB indicators                ranking if you have no regulation (i.e.,
                   sensibly and in tandem with other data. One             property registry). IEG pointed out that the
                   member observed that the tension that exists            introduction of the "Reformer's Club" in the DB
                   with regulations that can either be promoted by         marketing clearly signals a normative
                   rent-seekers or to protect the public interest is       interpretation to the rankings. A member
                   always present. The DGE observed that the WBG           added that countries have varied constraints
                   has the responsibility to emphasize both the            (e.g. scarce resources, limited capacity), and
                   importance of efficiency in implementing                these may be exacerbated by competition to
                   regulations as well as their potential value            improve rankings. He further added that the
                   added.                                                  Bank is not in a position to rank its members.
                                                                           Management noted that countries have used
                   Disclaimer and Transparency. Several members            the indicators constructively, while also taking
                   noted the importance of communicating what              into account quality issues and country-
                   the DB report measures. A member remarked               specific limitations.
                   that DB was not a business-climate ranking or
                   indicator and that it was important to communi-         One member asked that the request to withdraw
                   cate (i.e., disclaimer) the meaning of these            the rankings should be seriously considered.
                   regulatory indicators. Management added that            Another member suggested that a best practice
                   it was very important for the Bank to communi-          component could be added, while another
                   cate what it is that we are measuring and what          member noted that benchmarks are not unique
                   we are not. Some speakers noted that they               to DB and are part of a wave of international
                   would like clear disclaimers and comments on            standards. A speaker observed that measure-
                   the social value of good regulation. Management         ments for these rankings change after the
                   remarked that the DB report has a "health               release of the DB report. Management added
                   warning." It added that it would look to further        that when comparing the exercise to a similar
                   explain that deregulation is not the main               evaluation at the OECD (i.e., Product Market
                   purpose of the DB report.                               Regulation for OECD Countries), in the case of
                                                                           regulatory complexity and costs, the OECD and
                   Regulation Enforcement and Impact. A few mem-           DB rankings are highly correlated. IEG noted
                   bers commented that indicators measuring                that improvement in DB country rankings
                   regulation effectiveness must also measure              should not be characterized as improvements
                   impact on the ground. Management noted that             in the business climate; rather, they should
                   the DB report not only looks at the level of            be interpreted as a partial indicator of a
                   regulation but also at the compliance cost and          reduction in the regulatory burden.
                   how this affects local entrepreneurs. It also
                   added that there is a dimension of enforcement          Paying Taxes Indicator. A few members noted that
                   and implementation that is being observed by            the tax rate issue was an important one to flag and
                   comparing DB data with data from the                    should be considered. A member noted that it
                   Enterprise Surveys, which capture the experi-           would be useful to retain the tax rate as part of
                   ence of actual business owners.                         the paying taxes indicator, while another
                                                                           member commented that the term "total tax" was
                   Country Rankings. Some members noted that               misleading. IEG noted that the reliance on a sole
                   country rankings needed further work, as a              source for information underlying the paying
                   change in rankings does not necessarily improve         taxes indicator is risky. IEG recommends that
                   the regulatory environment, thus making the             DB continue to gather and publish important
                   exercise arbitrary. Management commented                information about taxes that firms pay, but
                   that in some cases the DB indicators look for           discontinue factoring this into the overall
                   more regulation (i.e., protecting investors);           rankings. IEG commented that depending on a
                   while other indicators will give the lowest             country's resources and fiscal requirements,

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lowering taxes could prove to be negative for the          ongoing DB work is focusing on issues related to
investment climate, and indirectly for individ-            potential gender discrimination.
ual firms. A member stressed that the tax system
should be taken in its totality to evaluate the            Increasing Informants. Members noted that manage-
associated burden or ease for undertaking                  ment should use a strategic approach to selecting
business in a country. A speaker disagreed with            and increasing the number of informants (e.g.,
the proposed changes to the paying taxes indica-           accounting, tax experts) for DB. A few speakers
tor, as tax remains one of the major business              added that these should include relevant
constraints for business development (i.e., in the         stakeholders (e.g., employers, consumers). IEG
Africa Region) and argued that focusing only on            commented that DB should disclose how many
the administrative burden of paying taxes will             informants are the sources for each indicator,
weaken the DB methodology. Another speaker                 and that the reliability of the ratings would
noted that the issue was not the tax rate per se,          improve if this number were increased.
but at which threshold it became a burden to
business activity. Management noted that it did            Nomenclature. Speakers noted that titles for DB
not agree with excluding the tax rate. It noted            indicators should more clearly reflect what they
that in the Enterprise Surveys, one of the issues          are measuring. IEG recommended that the DB
most raised by business owners is the tax burden.          report be precise in the language used to
                                                           describe what is being measured, as the names
Employing Workers Indicator. A few speakers                of the many indicators may overstate the scope
thought that the WBG should encourage                      of their coverage. In the case of employing
countries to guarantee internationally recognized          workers, it covers specific rules about the hiring
worker rights and that DB should look to reflect           and firing of workers and hours of work, but
certain labor standards (e.g., collective bargain-         does not cover other critical areas (e.g., union
ing, forced labor). Management noted that the              rights, child labor).
employing workers indicator is consistent with
ILO standards. IEG noted that there are                    New Indicators and Subnational Regulation. A
anomalies in the employing workers ranking,                member suggested including the cost of regula-
as the top country is Singapore, with very good            tions on foreign direct investment within DB.
regulations, while the Marshall Islands, with no           Management noted that it was in the early
regulations, is second. A speaker commented                stages of piloting a foreign direct investment
that no one would confuse Singapore with the               indicator. IEG and management agreed that it
Marshall Islands when it comes to labor market             is important to pilot-test and validate new
regulation. Management noted that by focusing              methodologies before introducing any new
on the regulatory costs associated with employ-            indicators. A member proposed that subnational
ing workers, this indicator provides a basis for           government regulation be looked into. Manage-
analysis of how regulation relates to important            ment agreed with the idea of looking into
outcomes such as informality or higher levels of           subnational-level regulation (i.e., across cities)
women or youth employed. In that sense, a DB               and noted that it already has such a program
indicator triggers a conversation about a range            and now covers over 200 cities globally with
of issues related to it. Management added that             subnational reports.

                                                                                              Giovanni Majnoni
                                                                                                Acting Chairman




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